How to Manage Liability from Sexual Harassment Claims

As awareness around sexual harassment continues to grow and tolerance for misbehavior decreases, it has become more critical than ever to promote and ensure a safe workplace. But what if policies and training aren’t enough? Is your company prepared to deal with the fallout from a sexual harassment claim?

Almost every day, another company faces a sexual harassment allegation, but many private companies don’t have the insurance coverage in place to manage the different types of liability they will face.

Sexual harassment claims are not only damaging because of the out-of-pocket awards and the impact to a company’s reputation. They can also expose the company’s board of directors and executives to shareholder lawsuits if the enterprise value drops as a result of allegations and/or claims.

EPL policies typically cover damage awards and legal defense costs stemming from sexual harassment, discrimination, wrongful termination, and failure to provide equal opportunity of employment, among other allegations. The coverage will typically cover first-party claims – those arising from employees – along with claims from third-parties –customers, vendors or others with whom you conduct business.

D&O policies typically cover claims against board directors and executive officers stemming from managerial decisions that have an adverse impact on the company. This could include lawsuits arising from operational failures, a precipitous drop in stock value, failure to comply with regulations and/or maintain a safe work environment, among other issues.

A costly, growing problem

Sexual harassment claims are a growing challenge for privately held companies. Consider the following (Sources: MMA, EEOC, Chubb):

More than 40 percent of all EPL claims are filed against small, privately held businesses.

The average cost to defend an EPL claim is $150,000.

A private company is more likely to have an EPL claim than a general liability claim.

Almost 75 percent of all ligation against corporations involves employment disputes.

65 percent of employers who have fired an employee have been the subject of a discrimination lawsuit.

A growing number of claims from employment practices, including sexual harassment, are being filed with the federal Equal Employment Opportunity Commission (EEOC). Stringent regulatory rules and oversight by multiple governmental agencies typically result in favorable treatment for claimants.

The cost of coverage

The good news for private companies is that the cost of D&O and EPL coverage is affordable. Depending on deductibles and the carrier, a policy with $1 million coverage limit could cost about $10,000 per year.

In deciding on a deductible, a key question to address is a company’s tolerance for risk. The higher the deductible, the lower the premium. Each year, the average settlement in California has increased, so it’s prudent to have as much coverage as possible.

Of course, the best way to prevent sexual harassment claims is to maintain a corporate culture of respect and zero tolerance for abusive or unfair behavior. Strong written policies and regular training for employees are also critical.

Even with those safeguards, it’s important for companies to minimize their liability from sexual harassment and other employment practices claims by having the right coverage in place.